Transcript Role of the Private Sector Group (PSG)

Second International Conference on
FINANCING MUNICIPALITIES & SUB-NATIONAL GOVERNMENTS
The Role of Specialized Local Funds and Financial Intermediaries
(30 September – 1 October 2004, Washington, D.C.)
Policies of MDBs in Promoting
Private Finance for
Local Government Infrastructure
The Asian Development Bank
Alfredo E. Pascual
Director, Private Sector Operations
Decentralization trends in Asia
 Decentralization is happening in a number of Asian
countries, e.g.:
 Philippines (1991): Local Government Code
 India (1992): Nagarpalika (Decentralization) Act
 PRC (1994): separation taxing powers between the
central Government and the local governments
 Thailand (1999): Decentralization Law
 Indonesia (1999): Local Government Autonomy Law
and Central-Local Balance Financial Fund Law
 Pakistan (2000): devolution of authority and grant of
autonomy to lower-level government units
 Devolution of responsibility for delivering basic
services and providing physical infrastructure to local
governments is not always matched with
corresponding fiscal transfers from the center.
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Need for private finance
 Asian cities cannot finance the infrastructure
investments they need without accessing private
domestic savings.
 With decentralized governance, domestic credit
markets must be capable of generating long-term
financing for cities and their infrastructure agencies.
 Private sector financing modalities (e.g., bank loans,
bond issues) can enable local governments to
access markets reliably for the long run.
 Private sector participation in infrastructure can
facilitate access to private finance.
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But local governments are generally not
ready to access private finance.
 The challenge for MDBs is to help prepare local
governments through institutional reform and capacity
building. This preparation is hard work in a tough
environment. The process can take time (1-2 years).
 Reform areas have to be defined and financed. Among
these are the following:
 Rebalancing the books: better tax raising powers, cost
recovery strategies, tariff setting procedures.
 Setting up accounting, budgeting and financial reporting
systems to enable performance evaluation and rating.
 Building capacity for project preparation, design and
execution.
 incorporation of private sector participation in key services.
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Other enabling conditions are needed.
 Legal framework for security arrangements for local
government debt and enforcement mechanisms.
 Financial sector reform to deepen domestic capital
markets for debt.
 Establishment of appropriate capital market institutions:
rating agencies with capability to rate municipal risk,
credit guarantee companies.
 Strengthening of sector governance (e.g., in water):
regulatory framework, regulatory body.
 Leveling the playing field between governmentsponsored lending programs and commercial
institutions in the local credit markets.
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Pilot projects and model financing structures
are needed, too.
 Local government leaders sometimes lack confidence
in their execution capability. Development of a small
number of pilot projects that are successfully debt
financed and executed can help in confidence building.
 Financing structures (e.g., specialized financial
intermediaries, pooled finance schemes) can facilitate
access to private finance.
 Initial participation of or credit enhancement by trusted
partners such as MDBs can catalyze commitments from
commercial lenders and investors to fund projects or
intermediaries.
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The Asian Development Bank (ADB)
 ADB is a multilateral development finance institution
dedicated to reducing poverty in Asia and the Pacific.
 Established in 1966, we are now owned by 63
member countries, mostly from the region.
 Headquartered in Manila, with 24 other offices around
the world, including one in Washington, DC.
 Support for local governments, particularly in the
provision of basic services, is important in the pursuit
of ADB’s poverty reduction objective.
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ADB is in a good position to promote private
finance for local government infrastructure
 ADB’s sovereign lending, technical assistance work and
non-sovereign investment operations are under one roof.
 Synergy is possible between policy and advisory work
and support for non-sovereign financing transactions.
 ADB can dialogue with governments on policy and
institutional reform to create enabling conditions.
 ADB can catalyze private finance transactions by direct
participation and through risk mitigation.
 ADB has a broad range of instruments for policy dialogue,
advisory and project preparatory work, direct financing
and risk mitigation to help promote private finance for
local government infrastructure.
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ADB instruments
 Technical assistance and other knowledge products
to support and finance capacity building efforts.
 Sovereign loans to support policy and institutional
reform.
 Equity investments to help launch credit and bond
market institutions such rating agencies and credit
guarantee companies.
 Loans without sovereign guarantees to co-finance
projects, funds and needed financial intermediaries.
 Partial credit guarantees (PCG) and political risk
guarantee (PRG) for credit enhancement and risk
mitigation to facilitate private finance.
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Development and financing of a pioneer
municipal-level BOT water treatment plant
 Through the use of technical assistance, ADB helped
establish the first municipal-level BOT water project in
PRC. This was in Chengdu, province of Sichuan.
 The ADB technical assistance supported the preparation
of the project, drafting of contracts (take-or-pay) and
other legal documents, study of the project’s
environmental impact, evaluation of bids and selection
of the project sponsor (a joint venture between Vivendi
and Marubeni).
 ADB provided the project company with a direct loan
and a lender-of-record facility to encourage co-financing
by international banks.
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Investment in a guarantee company
 ADB has recently approved an equity investment in
the LGU Guarantee Company to help increase its
capacity to credit enhance bank loans and bond
issues of local government units in the Philippines.
 Established in 1998, LGU Guarantee Corporation
has insured a total of 12 bond issues by 10 local
government units.
 No underwriting losses have been incurred to date.
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Initiatives in local currency financing
 Local government financing requires local currency.
 ADB can issue its own local currency denominated
bonds to generate local currency funds for onlending
to borrowers in the host country. (India already done;
PRC, Philippines and Thailand to follow).
 ADB can also generate local currency via cross
currency swaps in the market or with the host
government. (e.g., $200 million swap and financing
facility approved for the Philippines: fixed-rate longterm peso to be lent to banks for onlending to
infrastructure projects and other borrowers).
 ADB partial credit guarantee is available to credit
enhance local currency borrowings or bond issues by
clients.
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